OECD: Japan Public Debt In ‘Uncharted Territory’ (WSJ)

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OECD: Japan Public Debt in ‘Uncharted Territory’ (Wall Street Journal, Oct 12, 2012):

TOKYO—Japan’s huge public debt load puts the world’s third-largest economy in “unchartered territory” and means the country may have to push through further tax and immigration reform over time, the head of the Organization for Economic Cooperation and Development said Friday.

“Size matters,” Angel Gurria said of Japan’s sovereign debt, now at over 200% of gross domestic product and the highest in the developed world.

The Bank of Japan’s current monetary policy means that debt costs very little to fund, but it’s still a constraint on future margins for fiscal policy, he said in an interview.

“You might want to stimulate the economy but there’s little room, and if growth and perhaps a bit of desirable inflation did pick up and rates were to rise, then the cost of the debt would pinch more,” Mr. Gurria said. “It’s mathematical.”

Unlike many struggling European economies, more than 90% of Japan’s government debt is held by domestic investors. Economists and analysts say that has helped insulate the market from potential shocks, such as further credit downgrades that could spook foreign investors.

Pressure on Spain to delay its request for help driving down sovereign borrowing costs is eroding the credibility of the European Central Bank’s new “bazooka” program, the OECD Secretary-General Angel Gurría told The Wall Street Journal.

But the existence of robust domestic savings is not the only indicator of sustainability, Mr. Gurria said. “If Japan were more reliant on foreign savings, maybe the debt would not have made it all the way to 200%,” he said.

The bill passed this year to double Japan’s sales tax to 10% from 5% by 2015 appears to stabilize the public debt level over the medium term, but ultimately that will depend on economic growth, which makes capacity for fiscal stimulus all the more valuable, Mr. Gurria said.

He had urged Tokyo to raise the sales tax all the way to 15%, he added.

That’s because he and the OECD say stronger economic growth in Japan will require boosting the size of the labor force, including by way of allowing more inward migration.

Japan’s labor market is characterized by strong duality, where protection for full-time employees is strong and companies are often reluctant to cut workers. Part-time or irregular workers who are often young, enjoy considerably less protection, and have been on the rise in recent years.

Irregular workers were about 35% of the workforce in fiscal 2011, according to government statistics, up from about 20% in 1990.

“Duality is a very serious problem, and it’s a growing problem, one that probably surfaced here even before similar issues in Europe,” Mr. Gurria said.

It’s important for Japan to “create a stable framework where one can productively absorb migrants,” he said.

Doing that is critical due to the well-known dynamics of Japanese demographic. “It’s not a photo but a movie” and future scenes will see further rises to life expectancy and correspondingly dwindling dependency ratios, he said.

Regarding rising tensions over a group of disputed islands in the East China Sea claimed by China and Japan, Mr. Gurria said it was essential that a timely, peaceful and legally stable resolution be found.

“This is a time when around the world we’re trying to build confidence and trust,” he said. “That two of the largest economies in the world are engaged in tensions is, how shall well say, particularly bad timing.”

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